Conforming lending is a standardized complex process. Generally 80% of the property value is the standard loan amount.
Many conforming loans are written at more than 80% of the property value; however, (and this is a huge “however”) there must be some way the integrity of the transaction is to “conform”.
Should a person require an additional 5, 10, 15, or 20% advanced there are choices that must be made. For each 5% threshold beyond 80% the guidelines require private mortgage insurance (PMI). Therefore a mortgage of $85,000 on a property valued at $100,000 is at an 85% loan to value ratio. An 85% loan to value ratio exceeds conforming guidelines by 5%.
There are two ways which most lenders will advance the additional 5%. Either the borrower purchases private mortgage insurance and pays a monthly premium, or the lender purchases the mortgage insurance policy and increases the borrowers interest rate to offset the cost.
Typical rate increases for lender paid mortgage insurance are as follows:
• 80.01 to 85.00 loan to value add .375 to rate
• 85.01 to 90.00 loan to value add .500 to rate
• 90.01 to 95.00 loan to value add .875 to rate
My personal point of view is that the borrower saves by having the lender pay the premium. There are tax benefits to having the lender pay the premium.
The lowest interest rates available are found in conforming mortgages.
One other way to avoid PMI is to obtain two mortgages: take a conforming 1st mortgage for 80%; and, close simultaneously on a 2nd mortgage for whatever percentage is needed beyond 80%. (Neither mortgage would require PMI).
Questions or comments regarding mortgage PMI will be answered promptly